Due diligence is an important step in the acquisition process that comes prior to closing a deal. Most people think about due diligence from a risk assessment standpoint or as a checklist of items that must be completed in order to move the deal forward.
Traditional reasons for undertaking due diligence include evaluating strengths and weaknesses of the seller’s organization, uncovering liabilities, and understanding risk. Ultimately the findings in due diligence are used to determine whether to proceed with the acquisition. Often, if liabilities are uncovered, buyers will try to renegotiate terms and get a lower price based on the findings.
While these traditional reasons for due diligence are useful and accurate, they can be too restrictive. By only focusing on the negatives in the organization you limit your thinking. Here are four ways to broaden your perspective and maximize the effectiveness of due diligence.
- Focus on opportunities – Instead of concentrating only on risks, think about how you create more value in the organization. For example, the seller may have a high cost for raw materials. Under the traditional approach to due diligence, you would flag this finding as a negative. However, this could be an opportunity for you to improve the company’s cash flow. As the buyer, you may be able to reduce cost of raw materials because you have a better purchase price due to the high volumes you are already buying.
- Plan for integration – Due diligence should not be used only to renegotiate terms or beat people up on price; it is really a tremendous opportunity to focus on integration and integration planning. Rather than focusing on yesterday, use it as an opportunity to guide your planning for the future.
- Identify star employees – We often ask the owner to identify key staff at their organization, but during due diligence you have a chance to do this for yourself. These star employees could contribute to the success of your organization for years to come.
- Craft a creative deal structure – If during due diligence, you find some problems with the organization, you don’t have to completely abandon the deal. Using a creative deal structure may allow you to get the deal done while isolating the liabilities. Instead of thinking about the deal as a binary decision of either 100% acquisition or nothing, consider how you can structure the deal for success. Perhaps a carve-out or minority interest would work in your situation.
Learn more in our upcoming webinar “A New Thinking on Due Diligence” on Thursday, May 26 at 1:00 PM ET.
Date: Thursday, May 25, 2016
Time: 1:00 PM EDT